Freeman

ARTICLE

The Independent Fights Back

JULY 01, 1958 by JULIAN H. HANDLER

Mr. Handler is an editor and author on food marketing and merchandising.

Two decades ago, the friends of the independent food merchant were ready to serve as his pall­bearers. The corporate chains were making such tremendous growth that proposed legislation to tax them to their death seemed to be the independent’s last hope. The plan failed and the independent was left to stand or fall on his own merits in the battle for survival under free competition.

What has happened since is startling indeed, in view of the tremendous odds that were then seen as stacked against the man who wanted to operate his own grocery market down the street from one owned by a big corpora­tion with the comparatively limit­less financial resources that could run him out of business.

Yet today, as the result of re­sourceful leadership and progres­sive action at all levels, the inde­pendent food merchant still ac­counts for the lion’s share of total grocery store sales, more than 60 per cent of the total.

This accomplishment has been effected through a revolution-with­in-a-revolution in marketing. Fun­damental, comprehensive, and dy­namic changes have completely altered the nature of the American food distribution field during the last 20 years. New efficiencies, with self-service in the forefront, have sharply reduced gross margins. Merchandising has taken on new forms. Attractive and sanitary packaging has replaced the cracker barrel and the tub of butter. No longer must the housewife go from grocery store to bakery to meat store to dairy to fruit store in order to purchase all her family’s food needs. The supermarket has become the mecca for convenient one-stop shopping.

The change has been so complete that most of us have forgotten what grocery marketing was like not too many years ago. The scope of this revolution in distribution can perhaps best be grasped by visualizing the average food store of a quarter-century ago and re­calling how it operated, while you stand in the middle of a super­market — "one of the miracles of America," in the words of a visit­ing monarch last year.

Competing with Chain Stores

The emergence of the independ­ent as an efficient and successful businessman under these totally new conditions constitutes the rev­olution-within-a -revolution that has equal significance in its social and economic aspects. To appreci­ate fully the extent of the climb of the independent from near-obliv­ion, it is only necessary to ex­amine marketing conditions as they existed in 1938.

The chains had been gaining an increasing proportion of the total business in many retail fields. They had many natural advantages of bigness. They commanded great total buying power that could be wielded to effect favorable pur­chases. This, plus efficiencies in op­erations that stemmed from their size, enabled the chain stores to offer measurably lower prices. Their corporate resources opened the way to the most desirable lo­cations and financed the building of attractive markets. The chains could advertise economically since each ad served many stores; to the independent, comparable advertis­ing for his one store was out of reach. Competent headquarters personnel for the chain could spe­cialize in each phase of market operation, providing a team of ex­perts that could not be matched by the lone wolf.

These built-in competitive ad­vantages of the chain appeared to be insurmountable for the inde­pendent. Since the small merchant was regarded as basically impor­tant to the American economy, and since his position seemed politi­cally exploitative, a campaign was started to turn the tide.

Tax legislation was introduced in many states and ultimately in Congress. The intent of the fed­eral bill was unmistakable. If it were enacted, the A & P, which then had 12,000 stores in 40 states, would have been required to pay a tax of $471,000,000 out of its earn­ings that year of $9,000,000. The Kroger Co., with 4,000 markets in 19 states, would have faced a bill of $71,000,000 though it earned only $3,700,000. The friends of the independent showed their belief that the only way they could keep him alive was to tax his competi­tion out of business.

Heated controversy raged over the tax plans. The side of modera­tion was typified by the views of the Secretary of Agriculture, who noted that some regulations might be necessary to maintain fair com­petition where chain practices were generally detrimental. "How­ever," he added, "we think it would be unwise and unnecessary to give up the economies which have been brought about by chain store distribution in order to pre­vent certain practices which may not be in the public interest."

Although the proponents staged a vigorous battle in support of the chain tax principle, the movement scored only minor successes and eventually was abandoned.

Without Government Intervention

Denied this legislative support, how did the independent food mer­chant manage to hold his position in a highly competitive field against such heavy odds? How did he survive the intense pressure of big chains? The key to the inde­pendent’s story of progress is co­operation. By two principal meth­ods, the merchant associated with other merchants in the common cause of survival.

One system has been built around the voluntary group, spon­sored by the wholesaler. The wholesaler supplies the initiative and the program for coordinating independent market owners in one cohesive operation. They are given a common name, so they can ad­vertise and merchandise collec­tively and enjoy other benefits similar to those that the individ­ual chain store derives from be­ing part of a corporate chain organization.

The other principal form has been the cooperative. In this ar­rangement the market operators, on their own initiative, develop a joint organization that owns its warehouse and hires a manager. Each market owner has shares in the company and any amounts ex­ceeding the operating costs of the warehouse are distributed among the holders.

While the ownership and some of the procedures vary, the two systems have much in common —particularly their function of keep­ing the independent market op­erator a going and successful busi­ness.

The new concept in marketing is symbolized by a statement in an annual report issued this year by one of the nation’s larger whole­salers, which listed its sales as over $100,000,000.

"Food distribution has under­gone major changes during the past ten years. Our role as whole­sale supplier is radically different from ten years ago. Our planning and thinking is devoted almost entirely to the continued develop­ment of modern retail food facili­ties in prime locations for quali­fied, proven operators," the annual report noted.

In arrangements such as these, the retailer-owned cooperative and the voluntary-group-sponsor both provide most of the headquarters services that are performed by chain main offices. Except under special conditions, however, the in­dependent retains ownership of his own market. In some cases, with large supermarkets the order of the day, the private owner may have an investment of around a quarter of a million dollars in his facilities.

By being a member of such an organization, cooperative or vol­untary group, the independent can serve his customers under condi­tions that enable him to be fully competitive with chain store neighbors. Since the members of the organization concentrate their business with the single distribu­tor as much as is feasible, the wholesaler can operate economi­cally, on a high-turnover basis, the same as a chain warehouse. Simi­larly, the wholesaler’s selling costs are reduced since the loyalty of the affiliated retailers makes it pos­sible for him to eliminate expendi­tures for salesmen. The savings are passed along to the retailer in lower cost of merchandise, which in turn enables the retailer to price his food products at the level of the chains.

In effect, this is enlightened selfishness at work. The whole­saler works to reduce his costs, so he can supply the retailer at a lower price so the retailer can sell at a price fully competitive with chain competition. If the whole­saler did not do this, and instead sought his profit through higher pricing, the retailer would ulti­mately go out of business and soon thereafter so would the wholesaler. Similarly, the retailer concen­trates his business with his prin­cipal wholesaler to help the whole­saler lower his costs and thus set the whole cycle into action.

Integrated Services

There are adjuncts to this basic marketing policy that further en­hance the status of the independ­ent market. Effective group adver­tising programs are conducted on the same basis as chain advertis­ing. Joint headquarters provide technical assistance that independ­ents, singly, could not afford.

The degree of integration of the retailer with his source of supply is indicated by the fact that head­quarters in some cases keeps the books for the market owners. In addition, headquarters will seek out new choice locations for mar­kets. If the retailer affiliate is not sufficiently capitalized to gain con­sideration as a tenant, the whole­saler may put its own name on the lease and help the retailer finance the undertaking.

" ‘Retailer-mindedness’ has be­come a by-word the wholesale fra­ternity is justly proud of," R. L. Treuenfels of the National-Ameri­can Wholesale Grocers’ Associa­tion reported to the most recent International Congress on Food Distribution in Rome.

In retrospect, the campaign for chain taxation may now be con­sidered as having been, in the long run, a liability for the cause of the independent. This could be true in that it suggested that the independent was not a fully effi­cient distributor, but instead needed a brake put on his com­petitor as an equalizer. Such thinking may still carry over among financial institutions, for example, whose assistance in ex­pansion might be helpful at this time. This may be so even though the character of the industry has changed completely.

Furthermore, the independent has demonstrated that resource­fulness and cooperation are surer ways than government interven­tion to sustain progress and pros­perity under the American system of free competition.

 

***

 

Ideas On Liberty
Strength Through Struggle 

The something-for-nothing-idea grows out of failure to see the purpose behind the struggle for existence. The fullest possible employment of one’s faculties is what makes for strength of body, of character, of spirit, of intellect. Nonuse of faculties leads to atrophy. The story of the wild duck that joined the domestic ducks, was fed, but later couldn’t fly above the barn; of the gulls that fattened up at a shrimp plant but starved when it shut down; of the cattle that became accustomed to pen feeding and died rather than forage any more; of the hand-fed squirrels that laid up no nuts for the winter but bit the hands that had fed them when they no longer held food — these and other stories of nature attest to principles of biology which are as applicable to persons who won’t use reason as they are to animals which haven’t the faculty of reason.

Leonard E. Read, Victims of Social Leveling

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July 1958

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